Underground banking in Malaysia: a case study of ROSCAs

Abstract

PurposeTo provide arguments in favour of legalising rotating savings and credit associations (ROSCAs) as they play an important role in savings and credit for women in Malaysia.Design/methodology/approachThe paper refers to previous studies on ROSCAs in Malaysia and extracts information that shows that ROSCAs are used mostly by women as a method of forced‐savings, credit and insurance against uncertainties. It suggests different methods that can be used to make ROSCAs more efficient. Finally, it provides suggestions for amendments to existing legislation which will not interfere with the social structure that supports ROSCAs, yet permit participants to sue defaulters.FindingsThe findings show that ROSCAs are widely practised in Malaysia especially in the rural and suburban areas. The participants are mostly women from middle income and low‐income groups who used it as a form of savings or credit. The benefits of permitting ROSCAs outweigh the risks. Legalising ROSCAs will not remove the benefits but will substantially reduce the risks.Originality/valueThis paper provides arguments to legalise ROSCAs in Malaysia and provides suggestions to ensure greater efficiency and a lower default rate. It also suggests amendments to the legislation to enable participants to take quick and cheap legal action against defaulters.